Many individuals yearn to become self-employed professionals. Individuals who do take the plunge discover newfound freedom; they also discover a new set of responsibilities.
Entrepreneurs must become adept at financial planning. It’s common to experience seasonality, and it’s essential to take time off from work.
Therefore, self-employed individuals must cover extended periods when they will not work.
Solopreneurs can build lifetime careers as independent contractors. Professionals who decide to hire employees also become financially responsible for them.
Small businesses that fail within the first two years fail for financial reasons.
Tracking expenses and financial information has become more accessible. Entrepreneurs can rely on accounting software to organize data and compile reports.
The functions of accounting software also make filing taxes easier. Thus, the investment pays for itself quickly.
We take a look at financial tips for self-employed professionals.
As entrepreneurs pay their insurance premiums monthly or annually, it might feel like something other than an investment. It’s different from paying rent, utilities, or new equipment – each has an immediate payout.
Filing a claim means something went wrong – a vehicle accident, stolen merchandise, or business interruption.
Nonetheless, independent contractors must purchase some types of insurance, such as:
- Worker’s compensation
- Social security
In addition, entrepreneurs must purchase health insurance and invest in a life policy.
Insurance protects the financial interests of the policy in various situations. For example, insurance for the self-employed has specific purposes.
Learn more about self-employed insurance.
Pay Yourself a Salary
Small business owners and solopreneurs benefit from paying themselves a salary. The practice helps them develop solid financial habits, such as separating personal and company funds.
Whether or not an entrepreneur can pay themselves a salary allows them to gauge their company’s financial health. Then, the amount left after paying the salary and bills is profit.
One way to gauge your salary is to use national averages. Then, ensure that the amount covers personal expenses, such as food and shelter.
Keep Track with Software
As money flows in and out of the company, it’s essential to track it. Professionals can manage their companies on spreadsheets and by keeping receipts in folders.
However, it’s more efficient to invest in accounting software.
Accounting software has become more user-friendly. In addition, users can compile reports and file taxes with ease.
The software is also an excellent tool for keeping track of financial goals. For example, entrepreneurs might need to purchase new laptops or smartphones. Others must purchase inventory or raw materials.
Incorporating software also helps business owners easily track invoices, accounts payable, and receivables.
Separate Business and Personal Funds
Some self-employed individuals remain sole proprietors. Others decide to incorporate their business, so they launch LLCs.
LLCs provide several benefits, such as protecting the owner from liability and passing it on to the business. Therefore, LLC owners must separate their personal funds from their business assets.
Separating the funds is a good habit. It prevents overspending in either category and forces good financial management.
Business owners have lost their savings when trying to cover financial holes with their personal funds. Then, they lost their company and personal assets.
Instead of commingling funds, work to keep each bucket healthy.
Establish an Emergency Fund
Since independent contractors experience seasonality, it’s essential to establish an emergency fund. Eventually, you’ll take a vacation and some time off. The fund can cover the trip’s expenses and time off.
In addition, it’s a great way to start saving for retirement.
Once professionals qualify for a money market savings account, they can earn interest and increase the balance without added effort.
Some entrepreneurs live off the interest, allowing them to weather seasonal, economic, and inflationary storms.
Reinvest in the Company
The amount of reinvestment that every company needs varies. Self-employed rideshare drivers must keep their vehicles in good condition.
Graphic designers should invest in the best software, and waxing specialists must replenish their supplies. After paying yourself a salary, you’ll see the amount left for reinvestment.
Then, the amount tells you about the company’s health. Entrepreneurs who struggle to replenish supplies can make adjustments to rectify the issue. Professionals with a surplus can save the funds or start planning for the future.
Plan for the Future
Some career paths allow self-employed professionals to work until they decide to retire. Others choose for them.
Moreover, accidents can occur without warning, or chronic conditions can reveal themselves.
Since self-employed individuals pay for their own benefits, they must also plan for the future. It’s always a good idea to save for retirement right away.
Saving in the early years allows the fund to grow more than starting later in life.
Self-employed professionals have the freedom to maximize their incomes. Once they establish stable revenue streams, entrepreneurs must protect them. Purchase insurance, reinvest in the company, and avoid commingling personal and company funds.